A Comment -- General Comments From an Expert (A Commentary)

Large Canadian banks for protection and growth? The banks are not cheap anymore, they are back to where they were in their heyday before the credit crunch. However, he thinks the capital is going to continue to go into them, and people are going to be surprised at how much higher they can go. Loan growth in Canada is looking pretty good. Although valuations are 12X, they are still a whole lot cheaper than many parts of the market. The best ones to own are the ones that have the highest tier 1 capital ratios, because they have the ability to make the most accretive acquisitions. That would be Bank of Nova Scotia (BNS-T), Royal Bank (RY-T) and the Toronto Dominion (TD-T). Also, the CIBC (CM-T) if they decide not to issue equity.

Markets. He is looking at the earnings of each company, but as long as the earnings are coming through he is willing to keep holding them. You have to be stock selective. Cap-X has been going up. Companies don’t feel the need to keep the money on the balance sheet so much now. He sees attractive companies in all sectors. There is no overweight in any one sector.

Markets. The GDP out of the US today was fantastic. This should lead to stronger earnings growth going forward. As long as we see the economy growing, which it has been over the last few quarters, we should continue to see earnings numbers from individual companies continue to be positive. Thinks there could also be some concern that the strong data means higher interest rates and less taper. A few things he is watching fairly closely are margin debts, which have continued to rise over the last several months. However, what is more concerning is that when credit gets pulled away, the margin debt numbers start to drop. He is seeing sentiment very much bullish for the newsletter writers, but the individual investors for the last 3 weeks in a row, have actually become more bearish. Two factors that he thinks are important for predicting a recession is 1) the price of oil, and whether or not it has seen an 80% increase in the past 12 months. We need oil to be trading in the $140’s for that to happen. 2) An inverted yield curve and we’re certainly not at that point in time right now.

Banks versus Lifeco’s? In his ranking system, lifeco’s rank a little bit higher. He looks for earnings growth and accelerated earnings growth. At this point in the cycle, insurance companies are going to see higher rates from higher interest rates. Also, bigger gains on their loan books based on capital markets.

Precious Metals. Six months to a year ago, he had no precious metals in his portfolios. The companies he looked at were probably in the bottom 2 deciles of his universe. In the last 6 months, these have come up in rankings. He is looking at more of these precious metal companies.

Markets. There are always smart people on both sides of every trade. Going back through the past 40 years, every time there has been a market top he can give you smart people that are saying keep buying, and smart people saying that it is going to be over tomorrow. You cannot predict these things. His customers are very worried about a correction, but he sees good earnings, good valuations and low interest rates, so it is not a problem in terms of what he sees going forward. Long-term trend looks pretty good right now. We are in the middle of a long-term shift, away from bonds and into stocks. In 2009, we were in a truly different type of economy. 2009, 2010 and 2011 was a recovery. Now we are into the regular type of economic recovery. Better job growth, better earnings and companies are spending again. Interest rates are going to go up one of these days, but they are going to go up because the economy is strong, not because they have to go back up to 10%.

Markets. He is not seeing any of the preconditions of a real market top. Even the 1987 plunge had at least 2 or 3 months of warning that something brutal was in the offing. He does not see it now. Unless something brand-new happens, then he thinks this bull market is going to head higher and head higher for some period of time. There are some stocks that are overdone such as the social media stocks, but that is much different than saying that there is a vast area that is set to collapse. Nothing like that on the horizon. Going forward, there will be some rotation, but that is standard in an ongoing bull market. There hasn’t been any rise in interest rates yet, and that is standard in a bull market. As the economic cycle wears on, a couple of areas in the market that are cheap, are materials, which had their big run at the beginning of the cycle and then let go, and have done nothing for the past 2-3 years. Also, interest-rate sensitive stocks like insurance companies are not too bad. Banks, by and large, have yet to see anything like a historically extended top.

Gold. Thinks gold is going higher. Governments of Japan, US and much of Europe are intent on trashing the value of their currencies. Longer-term they are not enhancing the underlying fundamentals of their currencies. In a long-term sense, that tends to be very positive for gold. Because of this, he thinks gold is a good buy. In juniors, if you pick them well, you get the best leverage, but there are many of the intermediates and seniors which make perfect sense. You just have to be patient.

Canadian Banks. First of all, Canadian banks are not a homogeneous mass. There are 6 of them and their valuations are all spread out. The one close to its historic peak is the Royal Bank (RY-T) and has been the leader all the way along, so he would still give that stock some decent upside potential of 10%-12%, but would be at a level where he would begin to look for another place to go. The potential of all of the banks is very, very strong, their balance sheets are superb, and bull markets never end until the banks top out, and our banks are not ready to top out. (See Top Picks.)

Markets. Earnings season has been very, very good. Looking at the next couple of years, now analyst’s estimates are pretty optimistic. The trend line in interest rates is still pretty much in place. We are in a liquidity trap were economies are recovering, but it is because interest rates are incredibly low. The markets have responded and that is the more important factor. Equities are the best place to be, driven by earnings. Stocks that are linked to the oil sands are starting to do better. In the short term they should have a slight correction, however.

Financial Stocks. The ZEB-T rallied about 5-6% past week. Analyst forecasts for next year are the same as where the banks are now. They might revise earnings estimates or the earnings are all built in to the bank stocks. If you are going into banks now, then ZEB-T is the best way to play because of the covered calls. But he sold Canadian banks last week to move into the US. He thinks they are a little stretched here.

All the short term bond ladders are good in his opinion. They are not without risk, if interest rates start to go up. They mitigate only some of the risk.

Canadian Railways. They have gone parabolic and for him very hard to invest in, knowing that at some point you will get a correction. He needs to see a test of support or a test of a longer term moving average.

Education Segment. Earnings. Large caps are hanging in relative to small caps because if we look at sectors on a share weighted basis, the large caps are generally driving more of the earnings and earnings growth. The R-2000 is flat on the year while the S&P has gone up. Energy and health care have been big movers. Industrials make good sense. IT has had a big boost. Trailing EPS should be $119.52 at end of year. 2015 and 16 will be 11% higher each year. He thinks you should continue to buy the dips.

Markets. Geopolitical situations could go haywire any time now around the world. R-2000 has taken a hit. There are comments about the poor quality of lending in the US. But he doesn’t see anything going very wrong at this point. It is essential that the republicans recapture the house in the US. Then people and companies will start spending. We had a period of tremendous cost cutting in US corporations. If the economic recovery continues you can see some tremendous upside on corporate earnings. There is potentially some tremendous upside. He is finding value here and there. Stock markets are not terribly overly valued.